A generous series of tax breaks enacted by Congress shielded the profits of U.S. corporations operating in Puerto Rico and helped transform the territory from a largely agrarian society to a manufacturing powerhouse, the Washington Post reported today. But what the federal government gave, it also took away. When Congress decided to phase out a crucial tax credit that ended in 2005, it helped plunge Puerto Rico into a recession that began a decade ago and has yet to end. Last week, Gov. Alejandro García Padilla said that the island could not repay more than $70 billion in debt, setting it down a path that could rock the municipal bond market and lead to higher borrowing costs for state and local governments across the U.S. Read more.
In related news, Puerto Rico’s governor says the island’s $72 billion debt load is too big to pay, but OppenheimerFunds Inc., the largest mutual-fund holder of the bonds, disagrees, Bloomberg News reported yesterday. As Alejandro Garcia Padilla begins to make the case for delaying debt payments, the New York-based company is building the opposite argument. On a conference call this week, its money managers said that data on sales-tax collections, unemployment and income growth indicate the economy is strong enough for the government to keep paying what it owes. “The governor’s new rhetoric, which we see as political cover after signing a budget that required unpopular spending cuts, is disappointing,” OppenheimerFunds wrote in a summary of the July 6 conference call. “The ability to pay remains intact.” Read more.
